Ubiquiti rises in debut, breaks U.S. IPO drought

Fri Oct 14, 2011 4:56pm EDT

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(Reuters) - Shares of wireless equipment maker Ubiquiti Networks Inc (UBNT.O) closed up 16.7 percent in their stock market debut on Friday after the company broke a two-month drought in the U.S. IPO market.

Investors shrugged off concerns over a U.S. government review of the company's sales into Iran to send its shares 16.7 percent above the $15 IPO price in their first day of trading on the Nasdaq. The shares closed at $17.50 after going as high as $19.00, up 26.7 percent, earlier in the day.

Ubiquiti makes wireless networking and video surveillance equipment. It priced 7.04 million shares at $15 on Thursday, the bottom of a lowered price range.

Europe's debt crisis and a weak economic recovery in the United States have made it difficult to price new issues. Most companies have opted to delay their IPOs until there is less volatility.

"A lot of companies have walked away. It's encouraging to see this deal work," said Morningnotes.com founder and IPO analyst Ben Holmes.

Holmes said the company's revenue growth and gross margins are impressive, and that after it cut the share price -- Ubiquiti sold shares for $6 below the midpoint of its original price range -- investors probably felt they were getting a good deal.

Ubiquiti's revenue has risen sharply in each of the last five years. It was profitable in each of those years except 2010.

In fiscal 2011, ended June 30, Ubiquiti posted net income attributable to common stockholders of $4.98 million on revenue of $197.87 million. Its gross margin during that period was 41 percent.

Rising markets likely also helped the share sale. The S&P 500 index .INX.SPX closed up 13.9 percent from an intraday low on October 4.

SALES INTO IRAN

While Ubiquiti is getting applause for completing its IPO, sales of its products into countries including Iran are being reviewed by the U.S. government.

Most of Ubiquiti's revenue in fiscal 2011 -- 70 percent -- came from overseas, and one of the penalties it could face would be loss of its right to export.

Ubiquiti said in its IPO prospectus that certain of its products were sold into Iran, Cuba, Syria, Sudan and North Korea and that some of its encryption components were sold without the appropriate export authorization.

In particular, it highlighted two distributors selling its products into Iran. Over the past three years, one distributor accounted for 7, 6 and 4 percent of Ubiquiti's revenue, the company said. It suspended sales to that distributor in February 2011 after it had continued selling into Iran after being told not to.

Ubiquiti said the other distributor's sales into Iran were not a "material portion" of the distributor's business with Ubiquiti, and that it now has a new agreement with that distributor that requires compliance with export control and economic sanctions laws.

"It looks like they have dealt with this," Morningnotes.com's Holmes said.

Ubiquiti said one U.S. government review of its sales into Iran resulted in a warning letter, and a second review is pending. The second review, by the U.S. Treasury's Office of Foreign Assets Control, could result in Ubiquiti facing fines, losing its ability to export, and being referred for criminal prosecution, the company said in the risk factors section of its prospectus.

In fiscal 2010, Ubiquiti recorded an expense of $1.6 million for export compliance, which it said is its best estimate of its exposure to fines.

U.S. relations with Iran are particularly sensitive right now because of an alleged attempt by Iran to assassinate the Saudi Arabian ambassador in Washington.

Ubiquiti said it did not mean to violate U.S. law but that violations occurred due to a "lean corporate infrastructure," an inexperienced management team, and the fact that most of its manufacturing and sales are outside the United States.

The company is headquartered in San Jose, California.

It said it has since revised its distribution agreements, disabled software downloads in certain countries, and obtained appropriate paperwork for its encryption products.

As of June 30, Ubiquiti had 92 full-time-equivalent employees in four offices globally. It has no direct sales force but instead relies on distributors, resellers and original equipment manufacturers. Ubiquiti Chief Executive Robert Pera is a former wireless engineer at Apple Inc. (AAPL.O)

Underwriters on the IPO were led by UBS Investment Bank (UBSN.VX) (UBS.N), Deutsche Bank Securities (DBKGn.DE) and Raymond James.

(Reporting by Clare Baldwin in New York, additional reporting by Rodrigo Campos in New York; Editing by Lisa Von Ahn, John Wallace, Gary Hill)

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